The government’s plan to amalgamate the roughly two dozen public sector banks into six large institutions is part of its attempt to bolster the capital base of these lenders.

The Centre’s plan to merge the country’s two dozen public sector banks into six large institutions is part of its attempts to bolster their capital base.(Illustration: Abhimanyu Sinha)

It is a business-as-usual day at a state-owned bank in Noida, a few kilometres off the national capital. The branch manager is busy talking to a client, occasionally sifting through a shower of numbers at his computer. The customer listens in, assiduously taking notes in between, as the manager scrutinises a string of documents.

Outside the manager’s glass cabin, about 20 employees are punching away on their workstations. At the far end of the hall, a customer presents a cheque to withdraw cash. The man across the counter in a 10X10 feet cubicle looks up and asks: “ATM card nahi hai kya? (Don’t you have an ATM Card?).” The customer replies that he is waiting for a new card as the old one had expired. Barely 15 feet away, there are four people at the ATM kiosk within the public sector bank (PSB) branch building.

Don’t let the image mislead you. The presence of fewer people at the branch site does not indicate less banking activity. ATMs – or automated teller machines — by definition, are meant to be 24X7 kiosks that dispense cash and offer sundry banking facilities. That also means customers worry less about updating a passbook or make “bank balance” inquiries. ATMs are at the core of India’s efforts to spread the banking net far and wide. As on March 31, 2015, there were about 130,000 ATMs run by state-owned banks in India. This roughly translates into about 10 ATMs for every 100,000 people. Thousands of crores of rupees move across accounts as they ride on the Core Banking Solution (CBS), a system that connects thousands of branches through encrypted and secure gateways enabling customers to operate their accounts from any branch.

Nationalisation to Consolidation

India nationalised banks in 1969 with the express objective of removing the concentration of control from the hands of a few. Besides, as the then Prime Minister Indira Gandhi put it, nationalization intended to give a “professional bent to bank management” and to “encourage a new class of entrepreneurs.”

Some of these goals were achieved. As the newly-nationalised banks were forced to open branches in remote areas, India’s savings and investment rate rose steeply from 13 per cent to 23 per cent of the GDP. Higher investment feeds into growth. The number of PSB branches multiplied tenfold — from about 8,000 in 1969, to about 87,000 today. In 1969, a public sector bank branch covered an average population of about 70,000. That figure has now come down to about 13,000. The Reserve Bank of India (RBI) first opened up the banking sector to private participation in 1993 when HDFC Bank, ICICI Bank and UTI Bank (now Axis) were set up adding technology, efficiency and a touch of glamour to the banking sector. Through the new banks RBI wanted to infuse competition and raise efficiency and productivity.

It did have the desired impact. However, the transition from thick dog-eared “ledger” book dominated PSBs to digital financial companies, like the branch in Noida, hasn’t been without pain. The management at public sector banks had to overcome stiff resistance from workers’ unions to push through computerisation, essential to hold on to ground in the wake of new players like ICICI Bank and HDFC Bank. Strikes were more commonplace amid a lurking fear of large scale layoffs. Machines, it was argued, would make many jobs redundant endangering the livelihood of thousands of families. For the 27 state-owned banks, it has been a steeple chase of sorts. Having more or less surmounted the tech battle, they have now walked into a war for capital. The non-performing assets (NPA), loans that have turned bad, have crossed Rs 4.3 lakh crore during the quarter-ended December 31, 2015. Besides, public sector banks are in dire need of more funds to meet the new capital adequacy norms under the global Basel III standards.

The move to amalgamate some of the two dozen banks into six large institutions is part of the government’s road map to adequately bolster the state-owned banks’ capital base. This is aimed at keeping the credit tap open for genuine businesses while ensuring that economic growth does not suffer. “You need strong banks rather than numerically large numbers,” Jaitley said after a recent two-day annual brainstorming event of industry leaders and officials from the RBI and the finance ministry in Gurgaon. What happens when you pool the individual savings of each member of a household? The figure looks large and formidable. If one individual slips into a crisis, the combined savings will take care of him and his dependents. Ditto for banks. Merging weaker banks with stronger ones will erect a protective ring for depositors and shareholders.

Since 1991, apart from a few cooperative banks, authorities have never allowed banks to fail. The government and the RBI oversaw the erstwhile Global Trust Bank’s takeover by Delhi-based state-owned Oriental Bank of Commerce. In 1993, New Bank of India was merged with Punjab National Bank (PNB), in a government initiated move to protect depositors’ interest. This was the last time a public sector bank merged with another. Likewise, Bank of Rajasthan Ltd was merged with ICICI Bank Ltd, in a process overseen by the regulator.

Mergers will also allow Indian banks to catch up with global peers. India’s largest lender SBI does not feature in the top 50 banks in the global ranking. According to a Forbes study, in 2015, four Chinese banks were listed among the top 25 lenders globally based on their profits, asset size and market value. The Industrial and Commercial Bank of China with a total asset base of $3,322 billion leads the pack. SBI, with an asset size of ` 20,48,080 crore or $310 billion is dwarfed in comparison. “We want good large banks to merge with each other and this has to happen,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, a Mumbai-based financial advisory firm.

Like all marriages, bank mergers too will call for necessary adjustments. For customers, the shared infrastructure will come as a big plus. For instance, there will be no cross-bank ATM usage fees between the merged banks. “Withdrawal of money from another bank ATM is often charged. This is something that should be changed,” said Meenu Sachdeva, a school teacher from east Delhi. Most of these public sector banks have local characteristics. For instance, the Indian Bank’s reach in the country’s southern region is far greater than that of a north-India headquartered bank. Mergers will allow customers use of the network. “Customer service interface will further improve to be best-in-class and this will help both depositors and borrowers,” said Saugata Bhattacharya, chief economist, Axis Bank.

What about interest rates? It is too early to say, but a combined entity will have more cash in hand. Logically, this should help in keeping borrowing rates low since the cash is likely to be lent out to individuals and companies, instead of being kept idle in the reserves. An opposing strand of thought, however, cautions that a few large inter-linked banks expose the broader economy to greater financial risks. The stunning collapse of Wall Street icons such as Lehman Brothers in 2008 exemplifies this argument. “Regulators should avoid helping the big banks to get bigger,” said a 2013 paper entitled “Big Banks and Macroeconomic Outcomes,” published on VOXEU.Org, the policy portal of Centre for Economic Policy Research, a network of over 500 researchers throughout Europe, researching a variety of macroeconomic topics, that hosts commentary by leading economists. Human resource issues like regional allegiances, ensuring employees fit in with the new culture, and chalking out a career path for them in the merged banks all need to be handled with care. Intra-organisation growth is generally quicker in a smaller company. A merger could hurt career prospects of those working in smaller banks. “Why is the focus on mergers at a time when the government should have put all its thrust on the recovery of loans?” Questioned CH Venkatachalam, general secretary, All India Bank Employees’ Association.

As of now, the government seems committed to fusing these institutions. “This will improve the efficiency and service delivery of the public sector banks,” said Shaktikanta Das, secretary, department of economic affairs. Experts, however, warn against a hurried implementation. The Air India and Indian Airlines marriage has still not settled down. Authorities can learn a few lessons from that experience. “The merger exercise will be a success only when it is a conscious business decision,” said Soumya Kanti Ghosh, chief economic adviser, SBI.

An alliance for the sake of just staying together may not necessarily lead to lasting matrimony.

WHAT’S GOOD

Shared infrastructure will give customers a wider use of the ATM network; charges on cross-bank ATM usage would reduce considerably

Customers of smaller banks will get access to wider use of financial instruments like mutual funds and insurance products that most big banks offer

Large banks would have a wider capital base enabling them to offer big ticket loans on their own without being part of a consortium

WHAT’S NOT GOOD

Many smaller banks will lose local characteristics, which customers preferred because of cultural affinity

A few large inter-linked banks increases the risk of a systemic trigger like the one seen during the 2008 financial crisis that pushed the world economy into a tailspin

Human resource issues can be ticklish; career growth of senior management and other workers could become knotty